All applicable large employers, generally those with 50 or more full-time equivalent employees, are required to file an annual return with the IRS reporting whether and what health insurance they offered full-time employees. This is reported on Forms 1094-C and 1095-C regardless of whether the employer provides a fully-insurance or self-funded plan.

Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, must be provided to each full-time employee by January 31, 2018.

Form 1094-C, which is the employer transmittal form, along with the government copy of the 1095-Cs are required to be filed by February 28, 2018.

We recommend you contact your insurance provider or payroll service provider to confirm if they plan to handle these required filings on your behalf. We have heard that many are not, so the responsibility lies with you to make sure these forms are filed timely. If you need assistance with these filings, please contact us. We are able to help with these and other year-end filing requirements.

January is a busy month for tax filings. The fourth quarterly installment of individual income tax estimates are due, payroll tax returns (including W-2’s) are due and 1099’s are due as well.

1099’s are those returns that report payments made by you to others, which are not reported on W-2’s. These payments include dividends, patronage dividends, royalties or interest aggregating $10 or more paid to any person or business during the calendar year. They also include payments made by you during such year, in the course of business, to another person or company in the form of compensation (other than W-2 wages), rents, commissions, premiums, prizes or awards, fees or other amounts of $600 or more. 1099’s are generally not required for payments made to corporations. Note that even if your business uses a fiscal year, 1099’s are filed on a calendar year basis. THERE ARE NOW SUBSTANTIAL PENALTIES FOR NONFILING.

What does this mean to you as a business person? This means that you will have to issue Forms 1099 for dividends, interest, rents, commissions, management fees, accountant’s fees, attorney’s fees, janitorial services, contract labor and most other expenses where the amount paid to a particular qualifying recipient for services equals or exceeds $600.

There are several types of 1099’s used in reporting. The ones you are most likely to use are:

1099-DIV – Used to report gross dividends and other distributions on stock aggregating $10 or more in a calendar year. This also includes non-taxable distributions, capital gains and liquidating dividends.

1099-INT – Used to report interest of $10 or more paid to another person. Generally, interest paid by individuals (outside of a business) is not included in the definition of interest on which reporting is required.

1099-R – Used to report distributions from qualified retirement plans.

1099-MISC – Used to report royalties of $10 or more and rents, non-employee compensation and all other fixed or determinable payments of $600 or more for services which are not reported elsewhere. You do not need to issue 1099’s for rent paid by a tenant to a real estate agent or for non-employee compensation paid to a corporation. Limited Liability companies are generally not corporations and should be issued 1099’s.

Non-employee compensation includes fees, commissions, prizes, awards or other forms of compensation for services rendered for your business by an individual or partnership which is not your employee. Examples of payments in this category are:

Fees paid for professional services, such as accountants, attorneys, engineers and architects.

Fees paid by one professional to another, such as fee-splitting or referral fees.

Fees paid for janitorial services, if not paid to an employee.

A fee paid to a non-employee and travel reimbursement for which the non-employee did not account to the payer, if the fee and reimbursement together equal or exceed $600.

Payments to non-employee entertainers for services.

All taxpayers engaged in a business which makes payments to an attorney must issue a Form 1099-MISC for the total amount paid, if that amount is equal to or greater than $600, even if the law firm is a corporation.

In addition, if you receive any interest income of $600 or more on an obligation secured by real property, in the course of your trade or business, you are required to file Form 1098.

Our firm, HSMC Orizon LLC, is a limited liability company. Its Federal EIN is 45-3576904. If you made payments from your business totaling $600 or more during 2016 to us, you will need to issue a 1099-MISC.

In all cases, the 1099’s need to be filed with transmittal Form 1096. The applicable due dates for submitting the forms to the recipient is January 31; for submission to the State of Nebraska (in cases where state income is withheld) is January 31; and for submission to the IRS is January 31, 2018.

Each return Form 1099 requires either (a) an employer identification number; or (b) a social security number. If the payee is not incorporated, the IRS requires that the name reported on the first line of the Form 1099 be consistent with the type of identification number provided. Thus, is you report the owner’s name first, you must provide the owner’s social security number on the 1099. If you report the business name first, then you must provide them with the business’ federal identification number. If you report the proprietor’s name on the first line and the business’ federal identification number, the IRS will not be able to match the two and you will receive a notice. If reporting using the business’ name, you need to report the business’ name and the federal identification number. If you do not already possess the identification number, you can request it by having the recipient fill our IRS Form W-9. Obtaining the tax identification number from each 3rd party with whom you do business, before issuing their first payment to them is highly recommended and is a best practice. Recipients of a payment are required to give their identification number upon request.

If you do not have, or properly report, the identification number of all recipients, you may be required to pay the IRS backup withholding equal to 28% of the amount of the original payment. If you don’t have, or cannot get, all identification numbers necessary, please contact us immediately.

For Nebraska – Please Note:

If you are a construction contractor, you and your related 3rd party vendors are subject to additional requirements imposed by the State of Nebraska Department of Revenue; having to do with contractor registration and withholding of Nebraska income tax from payments for construction services rendered in Nebraska. If you believe you may have this situation please call us.

In addition, there are special Nebraska regulations regarding withholding of Nebraska income tax from payments for personal services made to non-residents. If you believe you may have this situation, please call us.

For Missouri – Please Note:

All individuals, businesses and corporations who are required to make a federal at source information report and who make payments to a resident and/or nonresident of Missouri of $1,200 or more, which are not subject to withholding and not a part of an information report of S corporations or partnerships, must file an annual statement of those payments regardless of the manner or form in which payment is made.

The form needed for reporting miscellaneous income is Missouri Form 99-MISC (comparable to federal Form 1099-MISC). Copy 1 must be filed with the Missouri Department of Revenue, along with Form 96, Annual Summary and Transmittal of Information Returns. Copy 2 must be provided to the recipient. Copy 3 is the payer’s copy. This information must be filed on or before February 28 of each year for the previous calendar year.

There are penalties for late filing of Form 1099’s. Penalties for filing less than 30 days late are $50 per form; for filing more than 30 days late, but before August 1, 2018 are $100 and for filing later than August 1, 2018 or for not filing at all are $260.Remember that one form goes to the recipient and one goes to the IRS. Each form (and each copy of a form) will incur a separate penalty. Accordingly, if you are found to have not filed a 1099, the penalty would be $520. Additionally, if your failure to file is deemed by the IRS to have been caused by an intentional disregard of the filing requirements, the IRS will assess an additional penalty of $1,060.

On all business returns (as well as on Schedule C for sole proprietors) the IRS requires that you answer two questions. The first is “Did you make any payments during the year that would required you to file Form 1099?” The second is “Did you file Forms 1099?” These questions are an indicator of the level of interest the IRS is showing with regard to 1099’s. You absolutely do not want to be found to have incorrectly answered these questions and you cannot afford to have failed to file required Forms 1099.

If you have more than 250 1099’s to file, there is a requirement to e-file the 1099’s.

We would be pleased to assist you in preparing your 1099’s and/or your W-2’s. In order for us to prepare your 1099’s, we will need to know the name, address, identification number of, the amount paid to each recipient and the nature of the payment. In order for us to prepare your W-2;s, additional information may be required. If you would like us to assist you in preparing your 1099’s and/or W-2’s, please call us immediately, as they are required to be issued to the payees by January 31, 2018.

W-2’s used to be simply the device on which you totaled the amounts you paid your employees. They have now become much more sophisticated reporting devices. Not only is there a significant amount of additional information necessary, but much of that information will cause the amounts reported on the W-2’s (and the quarterly returns) to be something other than a simple totaling of your wage payments.

This document is intended to be instructive to you as you gather the necessary records for complete and accurate reporting. Below we’ve noted a number of issues to be aware of as you start assembling your wage and withholding information.

Due Dates and Return Filing

The W-2 forms must be furnished to employees and filed with the Social Security Administration by January 31, 2018. The employees’ mailing deadline is satisfied if the W-2’s are properly addressed, mailed and postmarked by January 31, 2018. If any W-2’s are undeliverable (e.g., returned to you by the post office) you should keep them for four years (e.g., until January 31, 2022). Do not send undeliverable Forms W-2 to the Social Security Administration.

There are penalties for late filing. Penalties for filing less than 30 days late are $50 per W-2; for filing more than 30 days late, but before August 1, 2018 are $100 per W-2; and if filed after August 1, 2018, are $260 per W-2. Remember that one form goes to the recipient and one goes to the IRS. Each form (and each copy of a form) will incur a separate penalty. Accordingly, if you are found to have not filed a 1099, the penalty would be $520. Additionally, if your failure to file is deemed by the IRS to have been caused by an intentional disregard of the filing requirements, the IRS will assess an additional penalty of $1,060.

If you have more than 250 W-2’s to file, there are special additional rules including more disclosures and a requirement to e-file the W-2’s.

Additional Disclosures Required

In addition to the normal wage payments, there are additional disclosures required. In past years, you may have seen on your own W-2 that box 12 contained codes A-E which represented different types of fringe benefits. This list has expanded to A-EE. If you have any of the following types of amounts involved in your company’s compensation plan, you will need to add additional disclosures:

A – Uncollected social security or RRTA tax on tips.

B – Uncollected Medicare tax on tips.

C – Taxable cost of group-term life insurance over $50,000 (included in boxes 1, 3 (up to social security wage base), and 5).

D – Elective deferrals to a section 401(k) cash or deferred arrangement. Also includes deferrals under a SIMPLE retirement account that is part of a section 401(k) arrangement.

If you have a plan in place which allows employees to withhold funds from their paychecks to purchase benefits on a pretax basis, additional reporting and calculations are required. You will need to calculate the amount each employee withheld for their costs and how much was spent for each type of benefit. This calculation can affect both the W-2’s and the employer’s quarterly tax forms. Benefits qualifying for this favorable treatment may include health insurance premiums, disability insurance premiums, medical expense reimbursements, dependent care expense reimbursements and group-term life insurance premiums (limited to $50,000 death benefit). Beginning in 2013, each employee can withhold no more than $2,500 per year.

Retirement Plans

If you have a retirement plan which allows employees to elect to redirect otherwise taxable wages to a tax deductible retirement plan (401(k), 403(b) or SIMPLE) on a pre-tax bases or to a Roth 401(k) or 403(b) plan (on an after-tax bases), you will need to report the amounts the employees had withheld from their paychecks and into which type of account it was deposited. This calculation can affect both the W-2’s and the employer’s quarterly tax forms.

It is imperative that you read the instructions carefully regarding which employees should have “retirement plan” box checked. You could cause your employee to be over-taxed or audited if you check the box incorrectly.

Health (HSA) and Medical (MSA) Savings Accounts

Done correctly, an employer’s contributions to either of these accounts on behalf of an employee are not includible in taxable income and as such are exempt from income and FICA tax withholding. The contributed amounts do, however, need to be reported on the W-2. However, there are strict non-discrimination rules which must be followed, as well as strict “notice” and “contribution” requirements. Failure to abide by these rules will result in an excise tax of 35% being levied on you, the employer. Thus, if you have made any contributions to your employees’ accounts, please let us know so that we can (a) test the contributions to ensure compatibility, (b) help you meet the “notice” and “contribution” requirements, and (c) help with reporting compliance.

Employees’ amounts withheld for these accounts, from payroll checks, on n after-tax bases are not exempt from income and FICA tax withholding. Insofar that they can benefit from deducting these amounts on their personal tax returns, they will need to be given the withholding information. This can be accomplished on the Form W-2. Amounts withheld on a pre-tax basis are considered to be employer contributions and need to be added to any employer contribution amounts (as noted above). These amounts are not subject to the above-noted “non-discrimination,” “notice” and “contribution” rules.

S Corporation Health and Accident Insurance

Accident and health insurance premiums (which now include long-term care insurance and Medicare insurance premiums) paid by the business on behalf of a more-than-2% S Corporation shareholder/employee are deductible to the corporation. There are, however, certain provisions that must followed to the letter:

The premiums must be either paid by the corporation or reimbursed to the shareholder by the corporation in the current year. This reimbursement must be made in cash. An adjusting journal entry to a shareholder will not suffice;

The premiums must be added to the shareholder’s W-2. They are subject to Federal and state withholding although they are not subject to either Social Security or Medicare taxes;

The actual cash wages must be at least as much as the insurance premiums; and

The shareholder gets to deduct the premiums as an adjustment on page one of the shareholder’s individual income tax return.

Total cost of premiums for 2% shareholder/employee (and their family);

Amounts withheld from the 2% shareholder/employees’ paychecks; and

Whether the full amount of the premium was paid by the corporation or was reimbursed to the employee.

Automobiles

Generally, if an employer-provided car is used by an employee for personal purposes (including driving to and from work), the value of the personal use must be included as wages on the employee’s W-2. Taxes (income and FICA) must be withheld from the employee’s wages and the employer (1) matches the FICA taxes and (2) also includes the wage amounts in the FUTA tax calculations. The employer must determine the value of the personal use. Fortunately, the IRS gives us a number of easy-to-administer methods to compute it.

The following questions need to be answered for each incidence of an employer-provided vehicle in order to determine the value of personal use for a particular vehicle/employee:

Vehicle make/model

Date placed in service for this employee

Cost (fair market value)

Is it new or used

Total miles driven during the year

Total business miles driven during the year (this does not include to and from work)

Were any vehicle expenses paid personally? If so, how much?

Was it available for use during off-duty hours?

Was it used primarily by a more-than-5% owner or related person?

Is another vehicle available for personal use?

We can assist you in performing these calculations and in fulfilling the reporting requirements.

Employee Business Expenses

If an employer requires an employee to substantiate the business expenses for which they are seeking reimbursement, the employer does not have to induce those reimbursements in the employee’s income. This serves three purposes: 1) the employer knows what business activities an employee is engaging in, 2) the payroll process is simplified and 3) both the employer and employee saves taxes (FICA and income). If the employee is not required to substantiate the expenses to the employer, the full amount of the reimbursement must be reported on the employee’s W-2 and taxes need to be withheld. To claim the deduction, the employee must include the expenses on his or her own tax return and substantiate them to the IRS. If you have any questions about this provision, please call us about an “accountable plan.”

Dependent Care Benefits

Compensation paid by an employer in the form of dependent care assistance plan needs to be reported on Form W-2.

Group-Term Life Insurance

Compensation paid in the form of group-term life insurance on the life on an employee is not taxable to the employee if the death benefit of the life insurance policy is not greater than $50,000. If the benefit is greater than $50,000, an amount must be included in the employee’s income and reported on the employee’s W-2. The amount(s) to be included on the W-2 is not simply a pro-rate portion of the premium. To calculate this taxable benefit we need to know:

The employee’s name;

The employee’s age at year-end;

The amount of the death benefit (by month, if it varies); and

The number of months of coverage.

Key employees are eligible for this $50,000 exclusion only if the life insurance is provided under a plan that does not discriminate in favor of key employees as to eligibility or the amount. This means that if you are not making the payments for all of your full-time employees, your key employees may not be eligible for the exclusion. In addition, premiums paid by an employer on individual (not group) policies are income to the employee and subject to withholding.

Employees Who Had No Federal Income Taxes Withheld

If, in 2017, you had an employee whose Form W-2 shows no Federal income tax withheld, you must now notify the employee that he or she may be able to claim an income tax refund because of the Earned Income Credit program. This notification can be accomplished by either using the official IRS Form W-2 (which has the EIC notice on the back of Copy B) or by issuing a substitute Form W-2 with the same statement.

Employer-Paid Taxes

If you paid your employees’ share of income and FICA taxes rather than deducting them from their wages, you must include the total amount of those taxes paid as a part of the employees’ wages. (This is very common in bonuses.) The total wages are then subject to income and FICA tax. We can help you calculate the amounts to enter on the W-2.

Household Employees

The withholding and reporting for household employees is generally very different than that described above and there is an entirely different set of rules that apply. Please call us to discuss these rules.

Deceased Employees

Before you make any payments of a deceased employee’s wages, please call us. There are a number of differences in how such wages are treated.

Additional Medicare Tax

Beginning with 2013, each employer is required to withhold an additional 0.9% Medicare tax on any FICA wages it pays to an employee in excess of $200,000 per year. The employer is not required to match this additional Medicare tax.

Please call us if you have any questions about your particular payroll arrangements. We provide a wide variety of services that allow us to tailor a solution to your needs.

We would all like our tax law to be simple and straightforward. If an expenditure is an expense, we think it should be deductible. Simple as that. Unfortunately, the reality is quite different. Many of the expenses we incur in our businesses require additional calculations to determine the deductible amount or additional documentation or filings to qualify for the deduction. Knowing these rules and requirements may preserve a deduction to which you might be entitled. Below is a summary of some items that have unique treatment for 2017. Most of these items will not change with the new tax law but there are a few that will, so it is important to review as more information becomes available.

Domestic Production Activities Deduction

Like the idea of getting a “double dip” deduction? Well, here you go. This is a deduction for qualified production by taxpayers. Qualifying activities include:

* The manufacture, production, growth or extraction of tangible personal property (e.g. clothing, goods and food)
* Software development
* Sound recordings
* Qualified film production
* U.S. production of electricity, natural gas or potable water
* Construction or substantial renovation of real property in the U.S.
* Qualified engineering and architectural services

The deduction is equal to 9% of the lesser of Qualified Production Activities Income (QPAI) or taxable income. The deduction is further limited to 50% of the qualified production activity W-2 wages paid by the taxpayer.

QPAI is equal to the domestic production gross receipts reduced by the sum of: (1) cost of goods sold that is allocable to the receipts; (2) other deductions, expenses and losses that are allocable to the receipts; and (3) a ratable portion of other deductions, expenses and losses that are not directly allocable to these or other receipts.

Repealed for tax years beginning after December 31, 2017.

Life insurance

Life insurance premiums paid by the corporation for policies that are owned by the shareholders or are payable to the shareholders are wages and should be included on their W-2’s and are deducted by the company as compensation.

Group-term life insurance premiums paid by the business on policies for the employees are deductible to the business. If the benefits are for more than $50,000 for any employee a portion of the premiums (as determined by an IRS table) must be included as wages and separately disclosed on the W-2.

Disability insurance

Disability insurance premiums can be deductible to the employer. However, it may not be a good idea. If the employer deducts the premiums any benefits from the policy that the employee receives will be taxable. If the employer includes the premiums on the employee’s W-2 as additional wages any benefits from the policy that the employee receives will NOT be taxable.

Health insurance

Health insurance premiums paid on behalf of employees for an employer-sponsored plan are deductible to the employer. These premiums must be separately disclosed on the W-2.

Special rules apply to more-than-2%-owners of S corporation. These premiums are deductible by the corporation and must be included in Federal and State wages (but not Social Security or MediCare wages. They must be paid (or reimbursed) out of company funds. They are deductible by the S corporation shareholder on that shareholder’s individual income tax return. The deductible premiums cannot be more than the amount of other wages paid to the shareholder. If it is not handled perfectly, the deduction is denied.

Meals and entertainment expense

All deductions for any expense require documentation. Meal and entertainment expense require more comprehensive documentation than most other deductions. In addition to the normal “when, where and how much” documentation the taxpayer is required to document “who you were with and how this applies to business”. Most meal and entertainment expenses are only 50% deductible for 2017.

Employee meals

Meals provided to the employee by the employer are deductible to the employer IF the meals are provided on or near the employer’s business premises and are provided for the convenience of the employer. Such meals are not taxable to the employee. Employers can also deduct de minimis meals such as coffee, doughnuts or soft drinks; occasional meals that enable an employee to work overtime; or occasional parties or picnics for employees and their guests. Beginning in 2018, the 50% deductible limitation will apply to these items.

Vehicle expense

Special documentation is required for vehicle expense. Generally speaking, a log is required which documents the business miles driven. The IRS has taken the position (and has been upheld by the courts) that if there is no log they will allow no deduction. If there is a log the taxpayer has the choice of calculating the deduction using the standard mileage rate (53.5 cents per mile in 2017) or a portion of actual expenses or deducting a pro-rata share (business miles/total miles) of actual expenses. The actual expenses include fuel, repairs, lease cost and depreciation. Pro-rata taxes and interest expense may be deducted using either method. The employee is required to submit and the employer is required to obtain documentation of the business miles driven. This is generally done via an expense report. The expense is deductible by the employer and not taxable to the employee.

If the employer pays the employee a flat amount (such as $50 per month) for mileage this must be treated as wages and is subject to payroll taxes.

If the vehicle is owned by the company the company is required to have documentation regarding the business miles driven. If the employee is allowed to drive personal miles using the vehicle the employee is required to report those to the employer. The employer is required (using an IRS table and computation) to add to the employee’s W-2 an amount calculated to represent the employee’s personal use of the company vehicle.

Memberships

Membership dues for professional organizations and those organizations you can demonstrate are necessary or useful for conducting business are deductible.

Membership dues for entertainment facilities, recreation or fitness clubs, airline clubs or social clubs are not deductible. However, if you are a member of, say, a golf club any out of pocket expenses you have for client entertainment would be deductible as detailed above.

Health Savings Accounts

Contributions to Health Savings Accounts by the employer are deductible. Non-discrimination rules apply. These contributions must be separately disclosed on the W-2.

De Minimis fringe benefits

Certain fringe benefits are deductible to the employer and not includable in the employee’s wages. These are generally benefits or services provided to employees that have so little value that accounting for it would be unreasonable. These can include personal use of employer-provided cell phones, occasional personal use of a company copy machine, holiday or birthday gifts with a low value, flowers or similar items for special occasions, occasional parties or picnics for employees and their guests, occasional tickets for theater or sporting events and certain meals (see above).

Repair expenses

The IRS issued very complicated regulations dictating the definition of repairs vs. improvements. If the company has made the appropriate elections, the company may be able to deduct repair expenses of less than $2,500 each. If the appropriate elections are NOT made the deduction may be limited to amounts less than $500 each.

Supply expenses

The IRS has issued very complicated regulations dictating the period in which the deduction for supplies can be taken. Generally speaking any supplies that are unused at the end of the tax year must be capitalized as inventory and not deducted until they are used. There is a de minimis rule that allows the deduction of units of property that cost less than $200 each. If the appropriate election is made, that limitation increases to $2,500.

First-year write-off and bonus depreciation

For 2017, taxpayers are allowed, in some cases, to deduct the full cost of assets in the year the asset is placed in service. This deduction faces a couple of limitations. First, if your total assets place in service during the year exceeds $2,010,000 the amount you can write off is limited. Additionally, the allowable deduction is limited to the amount of net income of the company before the deduction.

Taxpayers can also deduct up to 50% of the cost of new assets in the year of acquisition under the bonus depreciation rules. This deduction cannot be used on the purchase of used assets.

Keep in mind that it is not always in your best interest to use these deductions. If the current-year tax bracket is lower than you expect future brackets to be, using these deductions could result in a higher total tax.

Payments for services, rents or interest

Payments the company makes for services or rents of $600 or more to a recipient or for interest expense of $10 or more require the company to issue form 1099-MISC or 1099-INT to the recipients.

For months we have heard President Trump’s proposed changes to our country’s income tax code, but the timing and extent of such proposals are unclear. While it seems little progress has been made in Congress, the White House has issued a fact sheet titled “2017 Tax Reform for Economic Growth and American Jobs,” which outlines what we might expect to see in tax legislation. Although available details on some of the proposals are limited at this time, we do know the key points of the proposed plan, as well as the House Republican plan.

1) Corporation Tax Rate Reduction – President Trump has proposed a reduction in the highest corporation tax rate from 35% to 15%. This change is intended to spur growth in our economy and make the United States more competitive in a world environment. The United States currently has the highest tax rate among industrialized countries. The House plan is to reduce the corporate tax rate to 20%.

2) Individual Tax Rates – President Trump’s plan reduces the number of tax brackets from 7 to 3. The highest marginal rate is scheduled to be 35%. This is a 4.6% decrease from the current top rate of 39.6%. Additionally, the current 3.8% Net Investment Income Tax is scheduled to be eliminated. If you’ve been subjected to this additional tax in the past, then potentially the total decrease could be as high as 8.4%. The plan also includes a maximum rate on pass-through income at 15%. The House plan has three brackets at 33%, 25% and 12% with pass-through income at a maximum rate of 25%.

3) Standard Deduction vs. Itemized Deductions – With a doubling of the standard deduction and an elimination of many of the deductions normally taken on Schedule A (i.e. the deduction for state income taxes paid), fewer taxpayers will be itemizing their deductions, which will help low and moderate-income taxpayers. The two deductions protected under the President’s plan are the charitable contribution and mortgage interest deductions. The House plan includes similar provisions.

4) Alternative Minimum Tax – Each year many taxpayers find themselves subject to the Alternative Minimum Tax (AMT). Since 1982, taxpayers have been subject to two tax calculations and pay the higher of the two taxes. The AMT rules eliminate or limit some of the deductions claimed for regular tax (i.e. state income taxes and miscellaneous itemized deductions) and impose nearly a flat rate on the adjusted income. The proposed changes eliminate the AMT. The House plan includes similar provisions.

5) Tax Relief for Families – While there are not many details as of yet, there are proposals to provide additional relief for families with children and dependent care expenses and a proposed repeal of the death tax. The House plan includes similar provisions.

6) Border Adjustment Tax (BAT) – Under the proposal, imports would be subject to a 20% tax that would not apply to exports. Proponents of the BAT predict it would raise revenue to offset rate cuts and help prevent an erosion of the corporate tax base. The House plan does not include a BAT.

While the legislative branch of our government has not taken any formal action on the Trump tax proposal, it seems there is a majority that believes both the corporate and individual tax rates should be reduced, the repatriation of income needs addressed and that low-income households and families should be provided tax relief. Speaker Paul Ryan recently stated that “Republicans agree on about 80 percent of a tax reform package. But working through the details could take some time,” which means the likelihood of any tax legislation being retroactive to 2017 is unlikely.

Therefore, it is a reasonable assumption that most businesses and moderate to high-income individuals will most likely pay tax at a lower rate in the future than they currently are and should develop a tax plan accordingly. To manage your income taxes with this in mind, you should accelerate expenses into the current year and defer income to next year. This approach is consistent with traditional tax planning, but this year it may have an even bigger impact than in the past. We recommend you begin to identify and evaluate options to maximize your tax savings with the proposed reforms in mind.

Tax reform in 2017 is coming! While we do not know what the final tax law will be, we do know there have been consistent themes supported by the President and the Republican leaders in Congress. One of these themes is not just the change in the corporate rate structure, but also a new concept in how pass-through entities are taxed. These proposed changes will most likely have a significant impact on your tax management and strategies. In response to these key changes, most business owners will want to review and evaluate their entity structure and the related benefits and consequences of each. The purpose of this article is to summarize these issues to help you prepare for considering alternatives in your structure as a new tax and regulatory system is enacted.

A business will be organized in one of the following entity types: sole proprietorship, C corporation, S corporation, limited liability company, general partnership or limited partnership. No single form is right for every owner. Instead, the choice depends on the relative importance to you of several key issues. The initial major consideration relates to the extent to which you wish to shield personal assets from the liabilities of the business. If this type of protection is important to you, then a C corporation, S corporation or limited liability company might be appropriate. These forms generally would protect you and the other owners from losing more than your investment in the business.

A second consideration is whether you want the business to be taxed as a separate entity or whether you want the entity’s items of income, credit, loss, and deductions to be reported on your personal income tax returns. If you want the entity to be taxed separately, then a C corporation is the entity type. One current drawback to a C corporation is that earnings can be taxed twice — once at the entity level and again when earnings are distributed to you and the other shareholders. Sometimes, however, double taxation can be avoided if the corporation pays out all of its earnings as deductible salary, consultation or rent. If you expect the business to generate losses, then a pass-through entity, such as an S corporation, limited liability company or partnership might be appropriate. In most cases, this would allow you, as an active owner, to offset the losses incurred in the business against other personal income.

Currently, taxation among entities other than C corporations varies significantly. The earnings of sole proprietorships, limited liability companies and partnerships are subject to both income tax and self-employment tax. The earnings of S corporations are subject to income tax but NOT to self-employment tax. Included in some proposals is a cap on the income tax rate applied to undistributed pass-through income. These changes, if adopted, will be significant and as with most new legislation, we expect the final regulations to be lengthy and complex.

A third important issue is the extent to which you, as principal owner, want to allow other owners or investors to manage the business. If you wish to restrict this right, the a C or an S corporation might be appropriate because share ownerships can be separated from management of the business and shareholder voting can be limited to organic matters, such as mergers or election of the board of directors. A limited partnership, with you as the general partner, is also a good choice because limited partners cannot ordinarily participate in the management of a business. If you do not wish to restrict the right to manage the business, then a general partnership or limited liability company might be suitable. Note, however, that limited liability companies can be organized in such a way as to severely limit investor participation in management.

A fourth issue to be considered is the extent to which you want other owners to be able to transfer their shares to third parties without restriction. If the entity will have only a few owners, then it might be prudent to restrict an owner’s rights to sell to third parties without the prior permission of the other owners. There are a number of ways to achieve this result depending upon which form of business is selected.

A final issue relates to the type and number of owners you anticipate the business will have. Most forms of business do not have restrictions in this regard. However, S corporations are only permitted to have individuals (who are not nonresident aliens) and certain trusts and estates as shareholders. Also, S corporations can have no more than 100 shareholders at any one time. Thus, depending on the nature of the ownership structure you plan to create, an S corporation might be inappropriate. And finally, partnerships must have at least two owners.

As new legislation is enacted in the coming months, now would be an excellent time to reevaluate the structure of your business.

All employers should note that the U.S. Citizenship and Immigration Services has issued a new Form I-9 that is required to be used for all new hires by January 22, 2017. Employers who fail to use the new Form I-9 will be considered out of compliance and can be subject to substantial penalties. Use of the new Form I-9 before January 22, 2017 is encouraged.

Looking Forward to 2017 and Beyond

As we digest the results of the long and exhaustive election, our focus can now shift to the future business environment and year-end tax planning. In doing so, we should consider aspects of the tax plan proposed by President-Elect Donald Trump during his campaign. While we realize his comments and proposals are a long way from adoption, this will at least give us some insight into what could be in 2017 tax legislation.

We have identified below the more significant features President-Elect Donald Trump has introduced as key points of his overall tax plan. They include:

Eliminate the estate tax.

Lower the top corporate tax rate to 15%.

Impose a lower tax rate of 15% on undistributed income from pass-through entities.

A repatriation of tax of 10% for cash and 4% for earnings not represented by cash from foreign earnings.

Revise the individual income tax brackets from 7 brackets to just 3, with the highest bracket being reduced from 39.6% to 33% for married filing jointly (MFJ) taxpayers with taxable income greater than $225,000. The other two brackets would be 12% for MFJ taxpayers up to $75,000 and 25% for those taxpayers between $75,000 and $225,000.

The aforementioned tax brackets would be the same for single filers with each starting at ½ the amount of taxable income for the MFJ filers noted above.

A significant increase in the standard deduction to $30,000 for joint filers and $15,000 for single filers.

Head of household filing status and personal exemptions would be eliminated.

The alternative minimum tax (AMT) would be repealed.

These proposals may or may not come to fruition, but the Republican control of Congress and the Presidency, sweeping tax changes are more likely to occur and should be considered in the tax planning process. The House Republicans have also proposed additional items for tax reform, as well as variations of items included in the Trump plan. It will certainly be an interesting year!

Now for 2016

In the following paragraphs we accumulated a number of tax planning ideas that may help reduce your income tax liability if you act before year-end. Not all actions will apply in your particular situation, but you will likely benefit from many of them.

Year-End Tax Planning Moves for Individuals

There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making to create losses or, in some cases, realize gains.

Postpone income until 2017 and accelerate deductions into 2016 to lower your 2016 tax bill and possibly pay tax at a lower rate next year.

This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2016 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances for potential changes in the tax brackets. Note, however, that in some cases, it may be beneficial to actually accelerate income into 2016.

Consider converting your IRA to a Roth IRA.

If you believe a Roth IRA is better than a traditional IRA and you are eligible to convert a traditional IRA to a Roth IRA, consider converting traditional IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA. Keep in mind, however, that such a conversion will increase your taxable income for 2016.

Reverse IRA conversions if values have declined.

If you converted assets in a traditional IRA to a Roth IRA earlier in the year and the assets in the Roth IRA account declined in value, you could wind up paying a higher tax than is necessary if you leave things as is. You can back out of the transaction by re-characterizing the conversion—that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.

Accelerate deductions even if you don’t have cash.

Consider using a credit card to pay deductible expenses before the end of the year. Doing so will allow you to claim these deductions in 2016 even if you don’t pay your credit card bill until after the end of the year.

Use withholding on retirement distributions to avoid underpayment penalties.

Take an eligible rollover distribution from a qualified retirement plan before the end of 2016 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2016. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2016, but the withheld tax will be applied pro rata over the full 2016 tax year to reduce previous underpayments of estimated tax.

Estimate the effect of any year-end planning moves on the AMT for 2016.

Keep in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state and local property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses of a taxpayer who is at least age 65 or whose spouse is at least 65 as of the close of the tax year, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. If you are subject to the AMT for 2016, or suspect you might be, these types of deductions should not be accelerated.

Implement an expense bunching strategy.

You may be able to save taxes this year and next year by accelerating or deferring itemized deductions such as real estate taxes, contribution and other allowable deductions.

Medical expense planning.

For 2016, the “floor” beneath medical expense deductions for those age 65 or older is 7.5% of adjusted gross income (AGI). Unless Congress changes the rule, this floor will rise to 10% of AGI next year. Taxpayers age 65 or older who can claim itemized deductions this year, but won’t be able to next year because of the higher floor, should consider accelerating discretionary or elective medical procedures or expenses (i.e., dental implants or expensive eyewear).

Retirement distribution planning.

Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-1/2. That start date also applies to company plans, buy non-5% company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn.

Although RMDs must begin no later than April 1 following the year in which the IRA owner attains age 70-1/2, the first distribution calendar year is the year in which the IRA owner attains age 70-1/2. Thus, if you turn age 70-1/2 in 2016, you can delay the first required distribution until 2017, but if you do, you will have to take a double distribution in 2017—the amount required for 2016 plus the amount required for 2017. Think twice before delaying 2016 distributions until 2017, as bunching income into 2017 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2017 if you will be in a substantially lower bracket that year.

Utilize Health Savings Accounts.

If you become eligible in or before December of 2016 to make health savings account (HSA) contributions, you can make a full year’s worth of deductible HSA contributions for 2016.

Utilize energy tax credits.

If you are thinking of installing energy saving improvements to your home, such as certain high-efficiency insulation materials, do so before the close of 2016. You may qualify for a “nonbusiness energy property credit” that won’t be available after this year.

Utilize annual gifting if you have a taxable estate.

Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and/or estate taxes. The exclusion applies to gifts of up to $14,000 made in 2016 and 2017 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Year-End Tax Planning Moves for Businesses

Deduct asset additions and improvements.

Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2016, the expensing limit is $500,000 and the investment ceiling limit is $2,010,000. Expensing is generally available for most depreciable property (other than buildings), off-the-shelf computer software, and qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property). The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make purchases before the end of 2016 will be able to currently deduct most if not all of their outlays for machinery and equipment. What’s more, the expensing deduction is not prorated for the time that the asset is in service during the year. This opens up significant year-end planning opportunities.

Businesses should also consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. The bonus depreciation is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the full 50% first year bonus write-off is available even if qualifying assets are in service for only one day in 2016.

Businesses may be able to take advantage of the “de minimis safe harbor election” (also known as the book-tax conformity election) to expense the costs of lower-cost assets, materials and supplies, assuming the costs don’t have to be capitalized under the uniform capitalization rules. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there is no AFS, the cost of a unit of property can’t exceed $2,500. Where the UNICAP rules aren’t an issue, purchase such qualifying items before the end of 2016.

Manage your taxable income.

A corporation should consider accelerating income from 2017 to 2016 if it will be in a higher bracket next year. Conversely, it should consider deferring income until 2017 if it will be in a higher bracket this year. A corporation should consider deferring income until next year if doing so will preserve the corporation’s qualification for the small corporation AMT exemption for 2016. (Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn’t qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.)

A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2016 (and substantial net income in 2017) may find it worthwhile to accelerate just enough of its 2017 income (or to defer just enough of its 2016 deductions) to create a small amount of net income for 2016. This will permit the corporation to base its 2017 estimated tax installments on the relatively small amount of income shown on its 2016 return, rather than having to pay estimated taxes based on 100% of its much larger 2017 taxable income.

Prepare to effectively utilize the Domestic Production Activities Deduction (DPAD).

If your business qualifies for the DPAD for its 2016 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2016 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. (Note that the limitation applies to amounts paid with respect to employment in calendar year 2016, even if the business has a fiscal year).

Consider deferring a debt-cancellation event until 2017.

Utilize suspended losses.

You should consider disposing of a passive activity in 2016, if doing so will allow you to deduct suspended passive activity losses.

Monitor your basis.

If you own an interest in a partnership or S corporation, consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.

In summary, these are just some of the steps that you can take prior to the end of the year to limit your income tax liability. Obviously, there are other tax planning strategies that are available for individuals and businesses, but they require more time and analysis to implement effectively. The best way to effectively manage your taxes is to work with our team and develop a tax plan tailored to your specific needs and situation.

According to a recent study published by the Federal Reserve Bank of San Francisco, researchers found that over a lifetime, the average college graduate will earn at least $800,000 more than the average high school graduate—even after taking into consideration the cost of college tuition and the four years of lost wages it entails.

That said, however, the need to set money aside for their child’s education often weighs heavily on parents. Fortunately, there are savings plans available to help parents save money as well as provide certain tax benefits. The most popular college savings program is the Qualified Tuition Program (QTP), also known as a 529 plan, which are often the best choice for many families.

In addition to these savings plans, every state now has a program allowing people to prepay for future higher education, with tax relief. With this type of plan, one is essentially buying future education at today’s costs, by buying education credits or certificates from the state or directly from a school. This type of program tends to limit the student’s choice to only participating schools within the state; however, private colleges and universities often offer this type of arrangement.

Under both programs there are two key parties: the Designated Beneficiary (the student-to-be) and the Account Owner, who is entitled to choose and change the beneficiary and who is normally the principal contributor to the program. There are no income limits on who may be an account owner. There’s only one designated beneficiary per account. Thus, a parent with three college-bound children might set up three accounts. Some state programs do not allow the same person to be both beneficiary and account owner.

Federal Tax Rules for Qualified Tuition Programs

Contributions made by an account owner or other contributor are not tax deductible for federal income tax purposes, but earnings on contributions do grow tax-free while in the program. Distributions from the fund are tax-free to the extent used for qualified higher education purposes.

Distributions used for a purpose other than qualified education is taxable to the individual receiving the distribution to the extent of the portion which represents earnings. In addition, a 10 percent penalty will be imposed on the taxable portion of the distribution.

The account owner may change the beneficiary designation from one to another in the same family. Funds in the account roll over tax-free for the benefit of the new beneficiary.

For gift tax purposes, contributions are treated as completed gifts even though the account owner has the right to withdraw them. Thus they qualify for the up-to-$14,000 annual gift tax exclusion in 2016. One contributing more than $14,000 may elect to treat the gift as made in equal installments over the year of the gift and the following four years so that up to $70,000 can be given tax-free in the first year.

However, a rollover from one beneficiary to another in a younger generation is treated as a gift from the first beneficiary, an odd result for an act the “giver” may have had nothing to do with.

Funds in the account at the designated beneficiary’s death are included in the beneficiary’s estate, another odd result, since those funds may not be available to pay the tax. Funds in the account at the account owner’s death are not included in the owner’s estate, except for a portion thereof where the gift tax exclusion installment election is made for gifts over $14,000. For example, if the account owner made the election for a gift of $70,000 in 2016, a part of that gift is included in the estate if he or she dies within five years.

A Qualified Tuition Program can be an especially attractive estate-planning move for grandparents. There are no income limits, and the account owner giving up to $70,000 avoids gift tax and estate tax by living five years after the gift, yet has the power to change the beneficiary.

Taxpayer’s may use multiple tax benefit programs in the same year, although generally expenses cannot be used for more than one program. Unlike certain other tax-favored higher education programs, such as the American Opportunity Credit (formerly the Hope Credit) and Lifetime Learning Credit, federal tax law doesn’t limit the benefit to tuition, but can also extend it to room, board and books (individual state programs could be narrower). A distribution may be tax-free even though the student is claiming an American Opportunity Credit or Lifetime Learning Credit, or tax-free treatment for a Coverdell ESA distribution, provided the programs aren’t covering the same specific expenses.

State Tax Provisions

State tax rules are all over the map. Some reflect the federal rules; some reflect quite different rules. Nebraska and Missouri offer a tax deduction for contributions to a state-qualified 529 plan. Nebraska allows a deduction of $10,000 ($5,000 for married filing separately) while Missouri allows a deduction of up to $16,000 for married filing joint returns ($8,000 for singles). For specifics comparisons of states’ programs, see http://plans.collegesavings.org/planComparisonState.aspx.

In summary, you can see there are complexities in using the tax favored savings plans, prepayment plans and using available tax credits where you will mostly likely benefit from some professional guidance. However, the most important thing you can do is start saving when your child is young. The sooner you begin saving, the less money you will have to put away each year. For example, suppose you have one child, age 6 months and you estimate that you’ll need $120,000 to finance his college education 18 years from now. If you start putting away money immediately, you’ll need to save $3,500 per year for 18 years (assuming an after-tax return of 7 percent). On the other hand, if you put of saving until your son is 6 years old, you’ll have to save almost double that amount every year for 12 years.

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